Deck 7: Costs

Question 1

Economic costs of an input include

A) only implicit costs.
B) only explicit costs.
C) both implicit and explicit costs.
D) whatever management wishes to report to the shareholders.

Answer 1

C

Question 2

Variable costs are

A) a production expense that does not vary with output.
B) a production expense that changes with the quantity of output produced.
C) equal to total cost divided by the units of output produced.
D) the amount by which a firm's cost changes if the firm produces one more unit of output.

Answer 2

B

Question 3

Sarah earns $40,000 per year working for a large corporation.She is thinking of quitting this job to work full time in her own business.She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business.Her annual opportunity cost of this new business is

A) $0.
B) $40,000.
C) $45,000.
D) $90,000.

Answer 3

C

Question 4

An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last.An economist may amortize the expense of a durable and never fully account for the total expense.

Question 5

If Option A costs $40 and yields 20 units of output and Option B costs $50 and yields 30 units of output,

A) Option B and Option A are equally economically efficient.
B) Option B is economically efficient relative to Option A.
C) Option A is economically efficient relative to Option B.
D) It is not possible to determine which option is more economically efficient.

Question 6

Fixed costs are

A) a production expense that does not vary with output.
B) a production expense that changes with the quantity of output produced.
C) equal to total cost divided by the units of output produced.
D) the amount by which a firm's cost changes if the firm produces one more unit of output.

Question 7

If a firm buys a building so as to have office space for its workers,the monthly opportunity cost of the building is best measured as

A) the monthly mortgage payment the firm must pay.
B) the price the firm paid divided by twelve.
C) zero.
D) the rent the firm could earn if it rented the building to another firm.

Question 8

Your company makes copper pipes.Over the years,you have collected a large inventory of raw copper.The production process involves melting the copper and shaping it into pipes.You also have a large stockpile of pennies.Suppose the price of copper rises so much that the copper in the penny becomes worth more than one cent.Should you melt down your pennies?

Question 9

The cost of waiting two months for health care to address a debilitating problem in Canada is most accurately described as

A) an explicit cost.
B) an accounting cost.
C) no real cost.
D) an opportunity cost.

Question 10

You have two career options.You can work for someone else for $50,000 a year,or,you can run your own business,with an annual revenue of $100,000,and explicit costs of $40,000 annually.Explain which career option a profit-maximizer would select and why.

Question 11

Economic efficiency entails

A) producing a given amount of output with the most expensive mix of inputs.
B) producing a given amount of output with the least number of inputs.
C) producing a given amount of output with the most inputs.
D) producing a given amount of output with the cheapest mix of inputs.

Question 12

The high cost of advertising during the Super Bowl will

A) not affect the efficient level of output because advertising is a sunk cost.
B) will affect the efficient level of output because profits will fall significantly.
C) not affect the efficient level of output because advertising is a fixed cost.
D) Not enough information given.

Question 13

Which of the following statements is NOT true?

A) AC = AFC + AVC
B) C = F + VC
C) AVC = wage/MP_L
D) AFC = AC - AVC

Question 14

Four years after graduating from college you must decide if you want to go on as an accountant (your college major)or if you want to make a career change and become a singer.The cost of your education will matter for your decision.

Question 15

Johnny has worked as a CPA for five years and wants to open his own public accounting practice.The cost of his college degree in accounting represents

A) the opportunity cost of this endeavor.
B) a sunk cost.
C) an expense.
D) a variable cost.

Question 16

Economists proclaim that competitive firms make zero economic profit in the long run.This shows how

A) detached economists are from the real world.
B) unrealistic economic theory is.
C) firms cover all their cost, both monetary and non-monetary.
D) firms cover only monetary cost when economic profits are zero.

Question 17

If Option A costs $40 and yields 20 units of output and Option B costs $50 and yields 20 units of output,

A) Option B and Option A are equally economically efficient.
B) Option B is economically efficient relative to Option A.
C) Option A is economically efficient relative to Option B.
D) It is not possible to determine which option is more economically efficient.

Question 18

When buying a piece of equipment,it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly.

Question 19

A firm's marginal cost can always be thought of as the change in total cost if

A) the firm produces one more unit of output.
B) the firm buys one more unit of capital.
C) the firm's average cost increases by $1.
D) the firm moves to the next highest isoquant.

Question 20

Why might a police officer not pull over someone speeding two miles over the speed limit?

A) The explicit costs of stopping the driver over are too high.
B) The opportunity costs of stopping the driver are too high.
C) The opportunity costs of topping he driver are too low.
D) The explicit costs of stopping the driver are too low.

Question 21

If average cost is positive,

A) marginal cost equals average cost.
B) marginal cost exceeds average cost.
C) marginal cost is less average cost.
D) Not enough information is given.

Question 22

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.The marginal cost of the 5th T-shirt is

A) 2.
B) 10.
C) 12.
D) 60.

Question 23

Suppose each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the short run,an increase in the price of shovels will result in

A) fewer shovels being purchased.
B) more workers being hired.
C) a decrease in the firm's output.
D) no change in the firm's output.

Question 24

Suppose a firm can only vary the quantity of labor hired in the short run.An increase in the cost of capital will

A) increase the firm's marginal cost.
B) decrease the firm's marginal cost.
C) have no effect on the firm's marginal cost.
D) More information is needed to answer the question.

Question 25

If average cost is decreasing,

A) marginal cost equals average cost.
B) marginal cost exceeds average cost.
C) marginal cost is less than average cost.
D) Not enough information is given.

Question 26

Which of the following will cause the average cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker
B) a $1 per pack tax on cigarettes
C) a $1 an hour wage increase paid to all cigarette production workers
D) All of the above.

Question 27

A specific tax of $1 per unit of output will affect a firm's

A) average total cost, average variable cost, average fixed cost, and marginal cost.
B) average total cost, average variable cost, and average fixed cost.
C) average total cost, average variable cost, and marginal cost.
D) marginal cost only.

Question 28

When a firm produces one unit,the variable cost is $3.When the firm produces two units,the variable cost is $6.What is the marginal cost associated with two units of production?

A) $2
B) $0.5
C) $6
D) $3

Question 29

If the average cost of producing a good is increasing as a firm produces more of the good,then which of the following must be TRUE?

A) AFC is falling.
B) AVC is rising.
C) MC > AVC.
D) All of the above.

Question 30

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.Which of the following statements is TRUE at all levels of production?

A) MC = AVC
B) MC = AC
C) MC > AFC
D) All of the above.

Question 31

Suppose the short-run production function is q = L^0.5.If the marginal cost of producing the tenth unit is $5,what is the wage per unit of labor?

A) $1
B) $0.5
C) $0.25
D) It cannot be determined without more information.

Question 32

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.Joey's dad is thinking of increasing the rent to $400 per month.As a result Joey's marginal cost of cutting grass will

A) increase by $100 divided by the amount of grass cut.
B) increase by $100.
C) decrease by $100.
D) not change.

Question 33

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then AFC equals

A) 0.
B) 1.
C) 10/q.
D) It cannot be determined from the information provided.

Question 34

Assume baseball player salaries are fully determined before the season starts.From the point of view of the baseball team owner,player salaries during the course of the season are then

A) variable costs.
B) marginal costs.
C) fixed costs.
D) average costs.

Question 35

Which of the following will cause the marginal cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker
B) a $1 per pack tax on cigarettes
C) a $1 million advertising campaign by the American Cancer Society
D) All of the above.

Question 36

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then MC equals

A) q.
B) q/10.
C) 10/q.
D) 1.

Question 37

Which of the following will cause the average fixed cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker
B) a $1 per pack tax on cigarettes
C) a $3 per hour wage increase
D) An increase in the demand for cigarettes.

Question 38

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.The average cost of the 5th T-shirt is

A) 2.
B) 12.
C) 52.
D) 60.

Question 39

If the marginal cost of producing a good is increasing as a firm produces more of the good,then which of the following must be TRUE?

A) AFC is rising.
B) AVC is rising.
C) MC > AVC.
D) MPL is falling.

Question 40

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then AVC equals

A) q.
B) q/10.
C) 10/q.
D) 1.

Question 41

In the short run,marginal cost is increasing when

A) MP_L is decreasing.
B) MP_L is increasing.
C) AP_L is increasing.
D) AP_L is decreasing.

Question 42

The slope of the isocost line tells the firm how much

A) capital must be reduced to keep total cost constant when hiring one more unit of labor.
B) capital must be increased to keep total cost constant when hiring one more unit of labor.
C) more expensive a unit of capital costs relative a unit of labor.
D) the isocost curve will shift outward if the firm wishes to produce more.

Question 43

In the long run,fixed costs are

A) sunk.
B) avoidable.
C) larger than in the short run.
D) not included in production decisions.

Question 44

The slope of the isoquant tells the firm how much

A) output increases when labor increases by one unit.
B) output increases when capital and labor are doubled.
C) capital must decrease to keep output constant when labor increases by one unit.
D) a unit of capital costs relative to the cost of labor.

Question 45

The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs."

Question 46

A firm can minimize cost by

A) picking the bundle of inputs where the lowest isocost line touches the isoquant.
B) picking the bundle of inputs where the isoquant is tangent to the isocost line.
C) picking the bundle of inputs where the last dollar spent on one input gives as much extra output as the last dollar spent on any other input.
D) All of the above.

Question 47

Assume Congress decides that Social Security taxes must increase in order to fund the system.This would

A) shift up the marginal cost curve for any firms that hire labor.
B) guarantee a decrease in profits.
C) shift up the average fixed cost curve for any firms that hire labor.
D) guarantee an increase in tax revenues.

Question 48

When the isocost line is tangent to the isoquant,then

A) MPL = MPK.
B) the firm is producing that level of output at minimum cost.
C) the firm has achieved the right economies of scale.
D) All of the above.

Question 49

A consumer purchases a book by driving across town to a bookstore,standing in line for five minutes to pay the cashier,and then pays $5.The same book is purchased by another consumer who spends 2 minutes placing the order over the internet for $10.The book necessarily cost the first consumer less.

Question 50

A windfall profit tax imposed on oil companies would shift the firms'

A) marginal tax rate.
B) marginal cost curve.
C) average cost curve.
D) production function.

Question 51

Assume Congress decides that oil companies are making too much profit and decides to tax oil companies for each gallon of gasoline produced.This would

A) shift the marginal cost curve up.
B) shift the marginal cost curve down.
C) shift the average fixed cost curve up.
D) shift the average fixed cost curve down.

Question 52

A firm's cost curve is determined by

A) congressional laws.
B) whether the firm hires engineers or not.
C) natural laws.
D) the firm's production function.

Question 53

When the isocost line is tangent to the isoquant,then

A) MRTS = -w/r.
B) the firm is producing that level of output at minimum cost.
C) the last dollar spent on capital yields as much extra output as the last dollar spent on labor.
D) All of the above.

Question 54

At what output level,q,is average cost minimized if the short-run costs for a company are C = 40 + 4q + q²?

A) q = 2
B) q = 0.
C) q = 40.
D) q = 2.

Question 55

The marginal cost curve intersects the average fixed cost curve at its minimum.

Question 56

If an isocost line crosses the isoquant twice,a cost minimizing firm will

A) use a different isocost line to select the bundle of inputs.
B) use the input bundle associated with the intersection on the higher point of the isoquant.
C) use the input bundle associated with the intersection on the lower point of the isoquant.
D) Both B and C.

Question 57

A firm's production function for pretzels is shown in the above figure.If the firm's fixed cost equals $100 per time period and the wage rate equals $1 per unit of labor per time period,calculate the firm's MC,AVC,and AC schedules.Do these cost functions follow the general rules concerning the relationships between MC,AVC and AC?

Question 58

In the short run,average variable costs are minimized when

A) MP_L equals AP_L.
B) AP_L is maximized.
C) MP_L is maximized and AP_L is increasing.
D) Both A and B.

Question 59

In the short run,marginal cost is minimized when

A) MP_L is maximized.
B) MP_L equals zero.
C) AP_L is maximized.
D) AP_L equals zero.

Question 60

Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.

Question 61

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,the firm's cost function is

A) TC = (w/r) ∗ q.
B) TC = (w + r)/q.
C) TC = (w + r).
D) TC = (w + r) ∗ q.

Question 62

If increasing returns to scale are present,the long-run average cost increases as more output is produced.

Question 63

The production of cigarettes is highly automated; however,a worker is required to monitor each machine.Machines and workers do not interact with one another.Given this information,there are most likely

A) economies of scale.
B) economies of scope.
C) constant returns to scale.
D) increasing returns to scale.

Question 64

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,the firm will experience

A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) The returns to scale cannot be determined from the information provided.

Question 65

A firm produces output according to the production function,q = L^4/3K^1/2 and faces input prices equal to w = $20 and r = $80.What is the minimum cost of producing 1140 units of output?

A) Cost = $780.
B) Cost = $694
C) Cost = $2,071.
D) Not enough information is given to answer this problem.

Question 66

If the marginal rate of technical substitution for a cost minimizing firm is 10,and the wage rate for labor is $5,what is the rental rate for capital in dollars?

A) )5
B) 1
C) 2
D) 10

Question 67

A U.S.firm currently produces 200 units of output according to the production function q = L^0.5K^0.5 and faces input prices equal to w^U.S. = r^U.S = $11.Should the U.S.firm move their company abroad where they will face input prices equal to w^abroad = $6.50 and r^abroad = $15.00?

A) Yes, because the total costs will fall from $3,859 to $2,810.
B) No, because the total costs will increase from $2,810 to $3,859.
C) No, because the firm has decreasing returns to scale.
D) Not enough information is given to answer this problem.

Question 68

If the cost of labor increases,the isocost line will

A) stay the same.
B) shift outward in parallel fashion.
C) rotate inward around the point where only capital is employed in production.
D) shift inward in parallel fashion.

Question 69

At the XYZ Co.,a unit of capital costs 3 times as much as a unit of labor.If the isoquants are convex,and the firm does not change its input mix in the long run,we can conclude that

A) MP_K = 3 ∗ MP_L.
B) the firm will not hire any capital.
C) the firm will hire 3 times as much labor as capital.
D) the firm will hire 3 times as much capital as labor.

Question 70

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,an increase in the price of shovels will result in

A) fewer shovels being purchased to produce the same number of trenches.
B) more workers being hired to produce the same number of trenches.
C) the firm wishing to produce more trenches.
D) no change in the firm's input mix.

Question 71

The total cost of producing one unit is $50.The total cost of producing two units is $75.At a production level of two units,the cost function exhibits

A) economies of scale.
B) rising average costs.
C) increasing marginal costs.
D) constant returns to scale.

Question 72

Suppose MP_L = 0.5 ∗ (q/L)and MP_K = 0.5 ∗ (q/K).In the long run,the firm will hire equal amounts of capital and labor

A) all of the time.
B) only when w = r.
C) only when w = 0.5 ∗ r.
D) at no point in time.

Question 73

The long-run average cost curve may initially slope downward due to

A) decreasing average fixed costs.
B) increasing marginal returns.
C) economies of scale.
D) All of the above.

Question 74

The above figure shows the long-run expansion path.The long-run average cost curve will be

A) horizontal.
B) downward sloping.
C) upward sloping.
D) vertical.

Question 75

If there are diseconomies of scale within a given range of output,which of following is(are)TRUE?

A) The short-run average cost curve must be upward sloping within that range of output.
B) The long-run average cost curve must be upward sloping within that range of output.
C) Long-run average cost must equal short-run average cost.
D) All of the above.

Question 76

If a production function is represented as q = L^aK^b,the long-run average cost curve will be horizontal as long as

A) a + b = 0.
B) a + b = 1.
C) q > 0.
D) L = K.

Question 77

Assuming that w and r are both positive,if the long-run expansion path is horizontal,then

A) MP_K = 0.
B) MRTS is a function of capital only.
C) w = r.
D) All of the above.

Question 78

Economies of scale in nuclear power plants exist because of

A) more efficient plant management.
B) a better understanding of the plant's idiosyncrasies, or learning-by-doing.
C) nuclear power technology changes.
D) both A and B.

Question 79

If the isoquants are straight lines or L-shaped,then a cost-minimizing firm will

A) not be able to minimize costs.
B) find the lowest isocost line touching the relevant isoquant.
C) find the highest isocost line touching the relevant isoquant.
D) choose not to produce any output.

Question 80

A change in relative factor prices will always result in

A) a change in the slope of the isoquants.
B) a tangency between the new isocost line and a new isoquant.
C) a rotation of the isocost lines.
D) All of the above.